Friday, 10 October 2008

"Price Stability" is Chaos

F.A. Hayek talking as if he were talking yesterday, with sage advice for today's politicians and central bankers:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection--a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end. ... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression. We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.

He said that in 1932, just three years after the US economy had crashed under the ministrations of the two 1920s apostles of "price stability," central bankers Montagu Norman and Benjamin Strong. At least Strong had the decency to die before he saw the final results of his destructive reign at the NY Federal Reserve. Norman was rewarded by the British government for his disastrous failure by having his contract renewed for another twelve years, at which time he was made a Lord.

8 comments:

The seeds of this destruction go back more than just 2001 of course. Companies and banks are also to blame, as no one can accurately measure any more what they're really worth and that's not due to credit expansion (but that certainly helped to fuel it).

But what is amazing is that Europe is going bankrupt and it's not front page news over there. It's insane to see that from a distance. Iceland bankrupt. the Netherlands nationalised a bank, Germany is talking about nationalising them all soon, England has nationalised 30% of the major ones, house prices are falling, and it is as if nobody is interested.

The source of the rot is the central banking scheme running in each country. Fiat money is issued in the absence of specie. More and more is issued over time. That is inflation. Fractional reserve banking amplifies the effect. The result is price rises and the boom-bust cycle.

What you have commented on is a huge expropriation of wealth from productive people towards insiders, cronies and power lusters. It's been going on for a while. Now the results are becoming very visible.

Socialism has never worked. Why should anyone believed it could possibly work for banks, finance and money is a mystery. Government schools failed. Government railways failed.Government aitlines failed. Government health systems failed. Government central banking is a failure. Government money is a failure as well.

Berend said......but there were quite a number of conmen out there who didn't tell us the true state of their books.

Just for curiosity here. Is withholding information like that by executives of a public company amount to insider information? See, those insiders can tip off their mates about such dire situations, where the rest of the shareholders are not aware of this information.

Where do you draw the line between misleading, misinformation, not forthcoming, dishonest , tip your mates with insider information and so forth?

Falafulu Fisi said: Where do you draw the line between misleading, misinformation, not forthcoming, dishonest , tip your mates with insider information and so forth?

I think that might be a role for the government. If you look at the CDS market, that's unregulated. You can't blame regulation here. Clearly the market corrects itself, but I think we would have been better off if such derivatives had been on the balance sheets.

I still have to see the final story, and I'm not sure if ever it will be told, but I think the cause of our crisis is two fold: the printing press and complex derivatives that no one knows what they're worth. So both too much regulation and not enough.

Regulation should be limited to proper accounting, i.e. presenting a dishonest balance sheet is lying.

I mean, do you know if banks currently are solvent or not? No one knows. That's why everyone is freaked out.

I wish we would see central banking abandoned, and regulation and strict enforcement of proper accounting. The opposite will happen of course.

Europe is nationalising its banks, and run by the governments they will become even more insolvent than they probably already are. And we'll abandon prudent accounting for even more "regulation" favored by lobbyists and politicians.

In sum, the Great Depression episode might indeed lend support to the Austrians concern that, once a credit crisis unfolds, the value of money is going to suffer. What is more, any such crisis would open the doors for government interventionism, seriously endangering the very principles on which the free society rests.

Yes. Certainly there has been a great deal of lying, fraud deception etc. The trouble is that the present system necessarily encourages such practices. The hazard with such set-ups (apart from the boom-bust cycle and the destruction of wealth and the opportunity costs) is that failure is rewarded; insuders are bailed out at the cost of other people's wealth and lives.

A free financial system (rather than the ill conceived socialist nonsense we experience presently- staggering along the edge of the abyss) encourages honesty and open accounting exactly as you anticipate. It would be far preferable.

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On another note, what really annoys me (aside from all the BS excuses of the denizens of the present set-up) is that emerging economic conditions will mean that many of the projects and interesting things I'd like to do will have to be postponed or ditched. It will be a full time affair protecting my family from the vexations that are going to be the fare for much of the population. So, lots of interesting things will go by the wayside.

I'm not a religious person but an associate is. Yesterday he commented on a passage he'd bookmarked in his bible. It related to the passover. He made the obvious analogy. We had an interesting discussion after that.

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